Anne Beck recently took over a beauty supply store. Her predecessor always ordered shampoo in quantities of 100 units. Anne is reevaluating this policy. Based on her analysis, the cost to place each order is $35 and the holding cost is $8 per shampoo bottle per year. The annual demand for this product is 3000 bottles. Should Anne change the current order policy and, if so, how much can she save

Anne should increase the order quantity to 162 units, that way the company will save $154 per year.

Explanation:

economic order quantity (EOQ) = √ (2SD / H)

order cost = $35 holding cost per unit = $8 annual demand = 3,000 units

EOQ = √[ (2 x $35 x 3,000) / $8] = 162 units

total order cost per year = order costs x number of orders = $35 x (3,000 / 100) = $35 x 30 = 1,050

holding costs per year = average inventory x holding cost = 50 x $8 = $400

if EOQ is used:

order cost per year = (3,000 / 162) x $35 = $648

holding cost per year = 81 x $8 = $648

total savings = ($1,050 + $400) - ($648 + $648) = $154